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Olusegun Enujowo


The market is surprise by the Fed's interest rate projections. Upcoming rates would suggest the terminal interest rate higher than expectations - however, analysts are again nervous and now are being surprised by the Fed (which acts exactly as we predicted) the question remains, whether the Fed will really hike this much...

More rate hikes will weigh on the economy. W expect from here on more headwinds and likely very limited upside potential for Wall Street before the end of 2022.

The Fed is pushing further back on dovish hopes and the interest rate projections coming in higher than expected.

The so-called dot-plot, which the Fed uses to signal its outlook for the path of interest rates, showed 17 of the 19 "dots" at a interest rates above 5% in 2023 (meaning as appropriate monetary policy). Seven of the 19 committee members saw rates rising above 5.25% next year.

We have to take this projection with a grain of salt as the Fed will make a dovish turn if a recession is visible (which, however, can take time), corporate earnings fall sharply - this could already be the case in early Q1/2023, if future inflation readings show a further strong decline (likely in the upcoming 3 - 4 readings) or if the labor market eases significantly (unlikely).

We don't see much upside potential for Wall Street for 2022 anymore from here (meaning that levels above yesterday's highs are rather unlikely). Traders and investors are positioning SHORT as high possible in the Nasdaq (near 11900).

It's worth mentioning, however, that Powell answered that it is appropriate to hike slower (likely with 25 bps increments) as he was asked if that would be a reasonable strategy moving forward - a small hint for further slowing. We don't expect stocks to crash from here.

We also see significant pressure on Asian and European markets (with ongoing concerns that further rate hikes from the ECB & BOE will weigh heavily on the Eurozone and UK economies). Rapidly rising infection numbers in China will likely keep the positive effect of easing in China muted in the first ~two months.

We see a nervous market with high volatility which increases the chance of panic profit taking and short-term rally to end in profit taking. A still weak USD however, points towards no crash of Wall Street before year end. Instead we will likely see mostly sideways movement. Growing uncertainty about the global economic activity in Q1/2023, however, will dampen trader's hopes.

Powell acknowledged a slow down in inflationary pressure and once again said that the US economy and labor market remains very robust. While investors seemed to have taken this positively - it also means that the Fed believes that the markets can withstand higher rates (which is also seen it it's interest rate projection).

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